Global Water Resources, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; interim financial statements are unaudited. The company operates water, wastewater and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. Share and per-share data were retrospectively adjusted for the 100.68-for-1 stock split completed April 28, 2016.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $6.816 million | $7.622 million |
| Operating income | $1.061 million | $0.775 million |
| Operating margin | 15.6% | 10.2% |
| Net loss | $0.314 million | $0.915 million |
| Basic and diluted loss per share | $0.02 | $0.05 |
| Operating cash flow | $2.436 million | $0.764 million |
| Capital expenditures | $1.371 million | $0.419 million |
Revenue declined 10.6% year over year, primarily because Valencia Water Company was condemned and transferred to Buckeye in July 2015. Excluding Valencia’s $1.2 million Q1 2015 revenue contribution, management reported adjusted revenue growth of 6.0%, supported by rate increases, service-connection growth and higher consumption. Operating expenses fell 16.0%; lower depreciation partly reflected the Valencia transfer and assets reaching the end of their useful lives. Net loss improved by $0.601 million, with lower interest expense, the Valencia growth-premium income and improved operating results among the factors cited.
Cash and cash equivalents were $11.418 million at March 31, 2016, versus $11.513 million at year-end; restricted cash and bond-service funds were an additional $9.051 million. Current assets were $19.533 million and current liabilities $13.311 million, implying working capital of $6.222 million. Cash flow from operations benefited in part from the timing of accrued liabilities and substantially lower deferred-compensation payments than in Q1 2015. Financing cash outflow was $1.151 million, including $1.160 million of dividends paid.
Reported debt carrying value was $104.584 million, including current maturities; bonds had $106.696 million of principal outstanding. The company reported compliance with debt covenants at quarter-end. It had approximately $9.0 million of debt and capital-lease interest and principal payments due before March 31, 2017, and management said it expected available cash and operating cash flows to cover obligations and operations for at least 12 months. The filing also cites $97.9 million of indebtedness net of debt-reserve funds; this is a different presentation from gross principal and carrying value.
Material changes and significant events
- Active service connections increased 2.1% from December 31, 2015 to 37,985; total connections were 38,867. Management reported that, excluding Valencia, active connections grew 2.3% year over year and water consumption increased 10.3%.
- The company completed an IPO in May 2016: 1,339,520 shares were sold, including the underwriter option, at $6.25 per share. Gross proceeds were approximately $8.4 million and reported net proceeds approximately $5.6 million.
- GWRC merged into the company on May 3, 2016, simplifying the holding-company structure. The merger and IPO were completed after quarter-end and are not reflected in the March 31 financial statements.
- On May 20, 2016, the company agreed to issue $115 million of senior secured notes at a blended 4.55% rate, intended to refinance existing debt and fund general corporate purposes. Closing was expected June 24, 2016; approximately $3.2 million of prepayment penalties were anticipated.
- Willow Valley, classified as held for sale, was sold to EPCOR on May 9, 2016 for approximately $2.3 million, subject to adjustments. A $176,000 write-down had been recorded in Q1 2015.
- The Valencia sale generated a $43 million after-tax gain in 2015. The company recorded $252,000 of Valencia growth-premium income in Q1 2016; the agreement provides $3,000 per qualifying new meter through 2034, subject to a $45 million cap.
Outlook, risks and other matters
No specific earnings or revenue guidance is provided. Management described growth prospects in its Phoenix-area service territories and expects capital expenditures to rise in 2016 and 2017 as it accelerates selected projects, partly to pursue reinvestment treatment for the Valencia condemnation gain; it expects lower spending in 2018 and later. The ACC’s rate decision phases in revenue-requirement increases through 2021, but Santa Cruz and Palo Verde, serving about 94.9% of active connections, may not file another rate application before May 31, 2017. The company also agreed not to enter new infrastructure coordination and financing agreements.
Key risks include Arizona concentration; reliance on local development and service-connection growth; rate-setting delays and limits on rate increases; drought, water-supply access and water-quality requirements; seasonal demand; construction and infrastructure needs; and operating, environmental, insurance and information-technology risks. The company relies primarily on groundwater and recycled water and notes that water supplies are finite and regulated. Management said ordinary-course legal matters were not expected to materially affect financial position, results or cash flows. A June 2, 2016 private letter ruling found planned water-reclamation improvements similar or related in service or use to the condemned facility for purposes of deferring the Valencia gain; actual tax consequences depend on qualifying reinvestment and timing.
Other notable items: becoming a public company required fair-value accounting for stock appreciation rights, increasing the liability by $103,000 with an offsetting adjustment to accumulated deficit. The filing reports effective disclosure controls and no material change in internal control over financial reporting. It also marks “No” to having filed all required Exchange Act reports during the preceding 12 months; investors may wish to understand the context of this response.
Investor verification priorities
- Confirm completion and final terms of the $115 million refinancing, including actual interest cost, prepayment penalties, covenants and use of proceeds.
- Track post-IPO share count, dilution from the GWRC merger and equity awards, and the company’s dividend policy; the stated intention was to pay at least $0.02 per share monthly, subject to board discretion.
- Verify realized revenue and connection growth excluding Valencia, and the durability of higher water consumption and rate-case benefits.
- Monitor planned capital spending, regulatory recovery and progress toward any qualifying Valencia-gain reinvestment.
- Assess groundwater availability, drought exposure, regulatory restrictions and the company’s ability to meet future service demand.